Commitments and contingencies

Leases

The Company leases various facilities under non-cancelable operating leases expiring through 2027.

On June 13, 2017, the Company entered into an office lease for approximately 39,000 square feet for the Company’s current headquarters in San Jose (the “Lease”) with a commencement date of June 1, 2017. The Company’s existing office lease for the facility was terminated and replaced by the new Lease. Upon commencement, the Lease had an initial term of one hundred and twenty-three (123) months, ending September 30, 2027, (the “Initial Term”) with a monthly rental rate of $41,388, escalating annually to a maximum monthly rental rate of approximately $72,525 in the last year of the Initial Term. Upon termination of the Lease, the Company anticipates a restoration cost of approximately $0.7 million.

In September 2016, the Company entered into an office lease for approximately 64,000 square feet of office and laboratory space located adjacent to the Company’s current headquarters in San Jose (the “Lease”). The term of the Lease commenced on January 1, 2017. Upon commencement, the Lease has an initial term of one hundred and twenty-nine (129) months, ending on September 30, 2027 (the “Initial Term”), with a monthly rental rate of $144,000, escalating annually to a maximum monthly rental rate of approximately $194,000 in the last year of the Initial Term. The Landlord has agreed to provide the office and laboratory space to the Company free of charge for the first nine months of the Initial Term through September 30, 2017. Upon termination of the Lease, the Company anticipates a restoration cost of approximately $3.1 million.

As of December 31, 2018, the future minimum commitments under the Company’s non-cancelable operating leases are as follows (in thousands):



Years ending December 31,
2019	$	3,618
2020	3,113
2021	3,059
2022	3,056
2023	3,049
Thereafter	11,437
	$	27,332

The total minimum lease commitment amount above does not include minimum sublease rent income of $1.3 million receivable in the future under non-cancelable sublease agreements.

The Company recognizes rent expense on a straight-line basis over the lease period. Rent expense under the Company’s operating leases was $4.2 million, $4.6 million and $2.4 million, respectively, in the years ended December 31, 2018, 2017, and 2016.

Litigation

From time to time, the Company is subject to various claims and legal proceedings, either asserted or unasserted, that arise in the ordinary course of business. The Company accrues for legal contingencies if the Company can estimate the potential liability and if the Company believes it is probable that the case will be ruled against it. If a legal claim for which the Company did not accrue is resolved against it, the Company would record the expense in the period in which the ruling was made. The Company believes that the likelihood of an ultimate amount of liability, if any, for any pending claims of any type (alone or combined) that will materially affect the Company’s financial position, results of operations or cash flows is remote. The ultimate outcome of any litigation is uncertain, however, and unfavorable outcomes could have a material negative impact on the Company’s financial condition and operating results. Regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.

In January 2010, Finisar Corporation, or Finisar, filed a complaint in the U.S. District Court for the Northern District of California, or the Court, against Source Photonics, Inc., MRV Communications, Inc., Oplink Communications, Inc. and the Company, or collectively, the co-defendants. In the complaint Finisar alleged infringement of certain of its U.S. patents. In 2010 the Company filed an answer to the complaint and counterclaims, asserting two claims of patent infringement and additional claims. The court dismissed without prejudice all co-defendants (including the Company) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each defendant. This dismissal does not prevent Finisar from bringing a new similar lawsuit against the Company. In 2011 the Company and Finisar agreed to suspend their respective claims and in 2012 the Company and Finisar further agreed to toll their respective claims. While there has been no action on this matter since 2012, the Company is currently unable to predict the outcome of this dispute and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

In January 2013, the Company was served with a lawsuit, filed in Belgium by a distributor called Laser 2000 Beneluo SA (“Laser 2000”) claiming unpaid commissions. The distributor agreement was formally terminated as of January 3, 2012. The Company paid $492,000 to Laser 2000 as partial settlement of claims and to avoid penalties from the Court and submitted a legal brief to court on September 16, 2013. Laser 2000 filed a response on December 16, 2013 and the Company filed the final rebuttal brief on January 30, 2014. In March 2015, the Belgian Court issued a ruling awarding Laser 2000 approximately one million euros in damages (approximately $1,100,000 at current exchange rates). The Company did not believe it would ultimately be liable for the full amount of damage and accrued $0.3 million in March 2015 for estimated probable net litigation expense relating to this matter. The Company appealed this verdict and, in April 2017 settled this case and paid approximately $250,000.

In December 2016 the Company was served with a lawsuit filed by Lestina International Ltd. (“Lestina”), in Santa Clara County, CA. The lawsuit is regarding a dispute of approximately $3.0 million related to purchase orders for the Company’s Low Speed Transceiver Products that was soon thereafter sold by the Company to APAT OE in January 2017. The purchase orders in question were included in the asset sale and were assumed liabilities by the purchaser of the business. The parties engaged in extensive negotiations and in January 2019, the parties agreed to a proposed settlement which was placed on the record of the Superior Court of Santa Clara County agreeing that NeoPhotonics Dongguan Co., Ltd. (“NeoDongguan”) (the Company’s wholly owned subsidiary located in China) would pay to Lestina a total of $2.2 million. Upon Lestina's receipt of full payment, Lestina will ship to NeoDongguan the remaining parts from the original purchase orders. The Company has agreed to be a guarantor for NeoDongguan on the payment obligation to Lestina. The $2.2 million settlement shall be paid in two payments of $1.2 million in February 2019 and $1.0 million in June 2019 respectively.

In April 2018, APAT OE filed three lawsuits in the Qianhai Court in Shenzhen, China against NeoPhotonics (China) Co., Ltd., NeoPhotonics Dongguan Co. Ltd. (collectively "Neo China") and NeoPhotonics Corporation claiming approximately twenty million US dollars in damages. The lawsuit is in reference to the sale of the low speed transceiver business to APAT OE from NeoChina. APAT OE claims that the business has been losing money and that APAT OE was not given all of the information about the business they purchased prior to signing the Asset Purchase Agreement ("APA"). In May 2018, counsel on behalf of NeoChina filed a motion objecting to the jurisdiction, claiming that the proper jurisdiction for any dispute between these parties is the Shenzhen Court of International Arbitration and the proper parties to this dispute are NeoChina and APAT OE, pursuant to the APA. In June 2018 a hearing was held in the Qianhai Court in Shenzhen, China. In August 2018, the Court ruled in favor of APAT OE. In September 2018, NeoChina filed an appeal with the Intermediate Court of Shenzhen, which held a hearing on the matter in October 2018. At that hearing arguments were heard regarding the proper jurisdiction for all disputes between NeoChina and APAT OE. NeoChina argued that all disputes between the parties should be decided in the Shenzhen Court of Arbitration per the APA between the parties. APAT OE argued that the Qianhai Court is the appropriate jurisdiction. In November 2018 the Intermediate Court of Shenzhen reversed the lower court’s (Qianhai Court of Shenzhen) judgment and ruled that the dispute shall be governed by the Shenzhen Court of International Arbitration, in favor of NeoChina, dismissing in totality the litigation against NeoChina. The litigation continues against the Company; however the Company’s position is that there is no existing contract between APAT OE and the Company and therefore no basis for litigation. The Company is unable to predict the outcome of this matter.

In December 2018, APAT OE applied to the Intermediate Court of Shenzhen for a pre-trial preservation order. On the same day the Court issued the order to preserve approximately $29.0 million of Neo China assets. The order is temporary. If APAT OE does not file a lawsuit against NeoChina within 30 days of the order, or if the lawsuit is dismissed the order will then be null and void. In January 2019, there was an additional pre-trial preservation order to preserve approximately $3.8 million of Neo China assets.

In the first quarter of 2019, APAT OE filed a lawsuit in the Intermediate Court of Shenzhen against Neo China, NeoPhotonics Corporation Limited (HK), Novel Centennial Limited (BVI) and NeoPhotonics Corporation, asserting claims and damages against all parties in the amount of approximately $36.0 million. The claims include but are not limited to allegations that defendants are responsible for a customer terminating APAT OE’s business, that defendants are responsible for APAT OE’s inability to complete a low speed business-related project and that defendants are responsible for loss of profits by APAT OE using a contract manufacturer that Neo China had been using prior to the sale. The Company is unable to predict the outcome of this matter.

APAT Arbitration

In June 2017, APAT OE filed an arbitration claim against NeoChina (collectively both of the Company’s China subsidiaries), claiming that approximately $1.5 million of the inventory that was sold to APAT OE by NeoChina in the APA was aged inventory and of no value. NeoChina brought a counterclaim against APAT OE. The arbitration was heard in the Shenzhen Court of International Arbitration in August 2017. In October 2017, NeoChina was informed that they were successful in the defense of the dispute and were also successful in their counterclaim against APAT OE. NeoChina was awarded approximately RMB700,000 (approximately $110,000) in compensatory damages and attorney fees as well as having the approximately $1.5 million claim against NeoChina rejected in its entirety.

In April 2018, APAT OE filed a Notice of Judicial Review of the arbitration judgment in the Shenzhen Intermediate Court in Shenzhen, China. The case was heard in May 2018, and NeoChina was successful in disputing the Judicial Review, which means that the arbitration judgment against APAT OE and in favor of NeoChina stands.

In July 2018 NeoChina applied together to the Shenzhen Intermediate Court for enforcement of the previous arbitration ruling because APAT OE had refused to perform the arbitral award. In October 2018 the Court enforced the award officially closing this arbitration matter.

In July 2018 NeoChina filed an arbitration against APAT OE in the Shenzhen Court of International Arbitration, claiming approximately $12.0 million in damages against APAT OE as related to liability under the APA. This case is awaiting a hearing date.

In November 2018, APAT OE filed an additional arbitration against NeoChina and the Company in the Shenzhen Court of International Arbitration, claiming approximately $7.8 million for liability under the APA. This case is awaiting a hearing date.

In February 2019, NeoChina filed a claim in the Shenzhen Court of International Arbitration against APAT OE and Zhejiang Merchants Property Insurance Company for losses and damages to NeoChina in the amount of approximately RMB350,000 related to the recent pre-trial property preservations filed by APAT OE and related legal fees.

Indemnifications

In the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

In November 2016 Oyster Communications, Inc. filed nine patent lawsuits against several defendants in the U.S. District Court for the Eastern District of Texas, including one against Cisco Systems, Inc ("Cisco"). One defendant successfully transferred their case to the U.S. District Court for the Northern District of California. Additional defendants requested venue changes are still pending. The Company was not named as a defendant in any of the lawsuits. In July 2017, Cisco notified the Company that it would be seeking indemnification from the Company for claims against Cisco arising from the lawsuits and the parties engaged in discussions and negotiations. In September 2018, the Company and Cisco signed a settlement agreement under which the Company agreed to pay to Cisco $300,000 to be paid by January 31, 2019 and $150,000 in product credits to be applied during calendar year 2019. This settlement resolves Cisco's indemnification claims against the Company in this matter.

Purchase obligations

The Company has open purchase orders with its suppliers for the purchase of inventory and other items in the ordinary course of its business. As of December 31, 2018, the Company’s estimate of outstanding amounts under these purchase orders was approximately $50.9 million, primarily expected to be purchased within the next 12 months. Certain of these open purchase orders may be cancellable without penalty.

Penalty Payment Derivative

In connection with a private placement transaction with Joint Stock Company "Rusnano" (formerly Open Joint Stock Company “RUSNANO"), or Rusnano, in 2012, the Company agreed to certain performance obligations including establishing a wholly-owned subsidiary in Russia and making a $30.0 million investment commitment (the "Investment Commitment") towards the Company’s Russian operations, which could be partially satisfied by cash and/or non-cash investment inside or outside of Russia and/or by way of non-cash asset transfers.

The Rights Agreement as amended in 2015 (the "Amended Rights Agreement") limits the maximum amount of penalties and/or exit fee (the "Rusnano Payment") to be paid by the Company to $5.0 million in the aggregate and allows such payment to be reduced when certain milestones are met over time. The Amended Rights Agreement also provides for an updated investment plan for the Company’s Russian subsidiaries that includes non-cash transfer of licensing rights to intellectual property, non-cash transfers of existing equipment and commitments to complete the remaining investment milestones through 2019.

As of December 31, 2018, the remaining Investment Commitment was approximately $6.7 million to be invested at any time on or before December 31, 2019. At any point between December 31, 2018 and December 31, 2019, the Company may elect to pay a $2.0 million exit fee to terminate any remaining obligations associated with the Investment Commitment.

Rusnano has non-transferable veto rights over the Company’s Russian subsidiaries’ annual budget during the investment period and must approve non-cash asset transfers to be made in satisfaction of the Investment Commitment. The Company accounted for the Rusnano Payment as an embedded derivative instrument. The fair value of the penalty payment derivative has been estimated at the date of the original common stock sale (April 27, 2012) and at each subsequent balance sheet date using a probability-weighted discounted future cash flow approach using unobservable inputs, which are classified as Level 3 within the fair value hierarchy. The primary inputs for this approach include the probability of achieving the Investment Commitment and a discount rate that approximates the Company’s incremental borrowing rate. After the initial measurement, changes in the fair value of this derivative are recorded in other income (expense), net. The estimated fair value of this derivative was $2.0 million as of December 31, 2018 and $0.4 million as of December 31, 2017. As of December 31, 2018, and December 31, 2017, the derivative was reported within Accrued and other current liabilities and other noncurrent liabilities, respectively on the Company’s consolidated balance sheets. See Note 9.

In December 2018, the Company signed a definitive agreement with Rusnano to sell the Company’s 100% interest in NeoPhotonics Corporation, LLC, the subsidiary for the Company’s manufacturing operations in Russia, for approximately book value. The purchase price to be paid by Rusnano will consist of approximately $3.0 million in cash and $1.0 million in cancellation of the remaining penalty payment that would otherwise be owed to Rusnano as consideration for the Company's obligations to provide manufacturing process transition to NeoPhotonics Corporation, LLC.